BofA to pay SEC fine in Merrill Lynch bonuses flap

Zachery Kouwe

It was a watershed moment of the financial crisis – a you-must-be-kidding payday that sparked a state investigation and an outcry in Congress. And, for Ken Lewis, it has become a multibillion-dollar headache.

Yesterday, the Securities and Exchange Commission accused Bank of America, the bank Lewis runs, of misleading its shareholders about $5 billion in bonuses paid by Merrill Lynch, the ailing brokerage giant that the bank bought last year.

The developments once again focus an uncomfortable spotlight on Lewis, who is struggling to win back investors and persuade them that his daring bet on Merrill will pay off.

The $50 billion merger, completed at the behest of federal officials, has been the subject of heated hearings in Congress, as has the question of who knew what and when about the Merrill bonuses. The payments were made despite mounting losses that soon forced Bank of America to seek a second lifeline from Washington.

Bank of America will pay $33 million to settle the SEC's claims, without admitting or denying the accusations, but the agreement is unlikely to put to rest questions swirling around the bank and its leadership.

Indeed, news of the settlement came on the same day that Bank of America announced a significant management shake-up, one that Lewis suggested puts in place several possible successors. Among the additions is former Citigroup executive Sallie Krawcheck, who will join Bank of America as head of global wealth and investment management.

The pressure on Lewis has been unrelenting. No sooner was the settlement announced than the CtW Investment Group, which has been highly critical of Lewis, again called for him to step down.

“He bears ultimate responsibility for the disclosure failure,” CtW said. The group, which represents several union pension funds, urged the bank to install a chief executive who could restore investor confidence and claw back bonuses paid “surreptitiously” to Merrill Lynch executives.

The SEC's lawsuit centers on statements Bank of America made in its proxy statement about the Merrill deal, which was announced Sept. 15. The bank told its investors in the proxy Nov. 3 that Merrill had agreed not to pay year-end performance bonuses or other incentive pay before closing the deal without Bank of America's consent.

But, unknown to investors, Bank of America had already agreed that Merrill could pay up to $5.8 billion in year-end compensation to employees, the SEC said in its complaint, which was filed in U.S. District Court in New York. That agreement was included in a separate bonus schedule that was omitted from the proxy statement, the SEC said.

“Failing to disclose that a struggling company will pay out billions of dollars in performance bonuses obviously violates that duty and warrants the significant financial penalty imposed by today's settlement,” Robert Khuzami, director of the SEC's division of enforcement, said in a statement.

The Bank of America-Merrill deal, as well as the government's role in it, drew sharp scrutiny on Wall Street and in Washington. Lawmakers armed with e-mail messages and internal documents have claimed at various hearings that Federal Reserve and Treasury officials had threatened to oust the bank's top management if it pulled out of the deal, a claim that various officials, including Fed Chairman Ben Bernanke, have denied.

Andrew Cuomo, the New York attorney general, who referred his investigation into the bonuses to the SEC in April, said that his inquiry was ongoing.